Q&A: Germany and the Greek debt crisis

Albrecht Ritschl of the London School of Economics says Germans should remember their status as postwar debtors when offering advice to Greece, where memories of Nazi atrocities still sting.

By , Correspondent

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    Gabriele Heinecke from Hamburg, Germany, protests in front of the German embassy in Athens on June 6. A group of German activists lent their support to Greek Nazi war victims in a demonstration demanding compensation from the German government.
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Tensions between Germany and Greece are one side effect of the Greek debt crisis. Germany is the country that shoulders the biggest part of the financial aid Greece is receiving from the European Union and International Monetary Fund. Consequently, some German politicians and parts of the media feel entitled to tell Greece what should be done – and Greeks don't seem to like it, judging by the anti-German slogans shown on banners and placards at demonstrations in Athens. Given Germany's history – not just its military one but its history as a debtor – Germans should think again before they criticize, says Albrecht Ritschl, professor of economic history at the London School of Economics, in an interview with the Monitor's Michael Steininger.

Professor Ritschl, should Germans abstain from giving Greece advice on how to manage the debt crisis?

Germans are perfectly entitled to give advice. The question is more, what kind of stance they should adopt. In Germany right now the public mood is at boiling point, and Germans seem to have conveniently forgotten, that not too long ago Germany had its very own debt problems and got back onto its feet after World War II largely due to very generous debt forgiveness.

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Germany is shouldering a big part of the financial aid and Germany reformed its job market in the last 10 years – a process not without pain. Aren’t the Germans entitled to their opinion?

Absolutely, and it is clear that Greece has to embark on structural reforms. The question is, how to sell this, how to advertise it and how to deal with the particular problems of the Greek society.

You just mentioned Germany’s own debt problems. What exactly were you referring to?

Germany’s major debt crises have to do with the two world wars. There was a double debt crisis after World War I, the first one in conjunction with Germany’s hyperinflation in the early 1920s, and the second one beginning in 1931 – pretty much exactly 80 years ago. That was largely about American credit to Germany, which had begun flowing in the mid-1920s. Germany essentially defaulted on that.

After WWII there was not a debt default by the Germans, but a debt forgiveness by the Americans, who as the occupying power in Germany were interested in quick economic stabilization.

How big were these debts problems compared to what Greece is going through right now?

Much bigger. One could argue that the German debt crisis of 1931 to 1933 involved foreign debt going bad which was equivalent to 20 percent of US gross domestic product at the time. In relation to GDP that would make the 1931-33 crisis as big as the 2007-2008 financial crisis and its effect on the American economy.

How were Germany’s insolvency problems solved then – the creditors waived their claims?

In 1931-33, part of the problem was solved through debt moratoria and debt forgiveness by the Americans. Another part was defaulted on unilaterally by the Nazi government coming in in 1933. After the war part of these debts were revived and repaid, but on very generous terms.

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Could such a procedure be a model solution for the Greek crisis, too?

There won’t be an easy end to the Greek crisis, whatever we do. We have the choice between two bailouts: one is the bailout of the Greek debt, which is currently happening. That’s Germany and other creditor countries essentially assuming guaranties, underwriting new issue of Greece’s debt. The other alternative is explicit debt forgiveness, a haircut essentially. There the question is, who is going to bail out the banks holding the debt. Large parts of Greece’s debt are owned by Germany’s and France’s public banking system, and other international banks. Whatever we do, we are facing substantial costs. It’s either bailing out the Greeks or our own banks.

Which bailout is preferable?

It’s a choice between two evils. What is preferable in the medium term are two things: First, imposed conditionality. In exchange for concessions we make to the Greek we ask them to make political concessions aimed at modernizing their economy. That is already happening. Secondly, we have to bring the crisis to an end. That is not yet happening, because right now we are only rolling over existing debt, probably adding to it. So we’ll have to come to debt realignment, a haircut, debt forgiveness, in exchange for a commitment to good financial housekeeping and a return to sound economic behavior.

But the Greek public does not seem to be in a mood to make concessions any more. Instead you see banners in the streets, demonizing European politicians, but in particular Chancellor Angela Merkel and Germany. Can you understand this kind of sentiment?

This is not just symbolic. This refers back to Germany’s military occupation of Greece during WWII and the economic exploitation of Greece by the Germans, not to mention the widespread atrocities committed by German troops. None of that is forgotten in Greece. After German reunification in 1990, Greece was the only nation officially asking for a reparations conference, asking the Germans to pay compensation for the damage done in WWII. Germany flatly denied any claims. And one could argue that Greece’s reaction to this was a financial recklessness that contributed to the current crisis.

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